Buying Blind

On Monday, Apple revealed that the company's co-founder and longtime CEO, Steve Jobs, is taking a medical leave of absence. The news came in a note sent to all company employees. "I will continue as CEO and be involved in major strategic decisions for the company," Jobs explained. "I love Apple so much and hope to be back as soon as I can. In the meantime, my family and I would deeply appreciate respect for our privacy."

The medical leave will come as little surprise to Apple employees, shareholders, and watchers: Jobs has suffered from serious health problems for years. In 2004, he was treated for a form of pancreatic cancer; in 2009, he underwent a liver transplant.

In the cold terms of company value, Jobs' health is a problem. Investors consider him the driving creative force behind Apple's most successful products, including the iPod, iPad, and iPhone—Jobs doesn't disabuse them of the idea—and the company's growth into the second-most-valuable on Earth. But Jobs' hesitancy to reveal details about his own health is also problematic, making it difficult for investors to consider whether and how his ailments might influence Apple going forward.

Indeed, Jobs is unusually—and, frankly, irresponsibly—cagey about his medical status. Consider his bout with cancer. In 2003, Jobs discovered that he had an "islet cell neuroendocrine tumor" rather than a more typically fatal pancreatic adenocarcinoma. At first, he attempted to treat the disease with a special diet rather than with invasive treatments. But in July 2004, he opted for surgical tumor excision with no chemotherapy or radiation. He did not reveal he had the cancer, or the surgery, until after the fact. Shareholders only found out when Jobs knew he had cancer in 2008.

More recently, he revealed that he suffers from a hormone imbalance and that his body does not take up enough nutrients from food. That condition seemingly led to a 2009 liver transplant, again revealed after the fact. But Jobs has never named a diagnosis, and nobody really knows what is wrong. (Common guesses include cancer and celiac disease.) His weight fluctuations—he ranges from gaunt to gaunter—have become a cruel fascination of the press, and his evasions about his weight and general wellbeing have confused and angered Apple investors and leaders. Jerry York, a former member of Apple's board (now deceased), was perhaps most vocal about his frustration. He reported that Jobs' lack of clarity "disgusted" him in an interview with the Wall Street Journal and said he considered quitting the board in protest.

Today's 112-word disclosure keeps with the pattern. Investors know Jobs is sick enough to take medical leave. But how sick? And from what? Nobody knows. Shareholders do not know whether he is leaving to undergo a procedure that might dramatically improve his health. They do not know whether he is seeking another unusual treatment. They have no idea whether he is on the verge of death. And they have no idea what happens to Apple if he's no longer at the helm.

That is a big problem. According to Bloomberg, Apple's stock has gained 37 percent per year, on average, since Jobs started his second tenure as chief executive in 1997. Though markets were closed in observance of Martin Luther King Day when news of Jobs' leave broke, foreign investors have already started selling off Apple stock—this, despite the fact that the stock hit an all-time high last week, as the company is expected to announce blockbuster earnings on Tuesday afternoon. In Germany, Apple shares dropped nearly 10 percent in the hour following Jobs' announcement, cutting more than $30 billion from the company's value in minutes. (When the trading day ended in Frankfurt, the stock had rebounded slightly, ending 6.7 percent off.)

Surely the sell-off will continue in the United States. Investors aren't just pricing in bad news about Steve Jobs' health. They're pricing in uncertainty about whether Jobs' condition is so bad that he won't return. Are Apple shareholders owed more information? Or is Jobs' desire for privacy both lawful and legitimate?

The answer to the first question is yes and no. While publicly traded corporations need to disclose events and changes that might "materially" affect the company, the Securities and Exchange Commission does not specifically require disclosures about CEO health. That vagueness in the law means that Apple has remained within the letter of the law with its disclosures. But that doesn't mean it is keeping with the spirit of it. Indeed, Apple gives the public the bare minimum of information, leaving watchers to read wildly into any statement. The point of the disclosure law is to reduce investor uncertainty and company opacity. Perversely, Apple's disclosures tend to introduce it.

Jobs' insistence on privacy when it comes to his health has renewed calls to re-examine the SEC laws about CEO disclosure. Legal experts and business professors say it would probably be legal for the SEC to declare that information about CEO health is "material." Professor Alexa Perryman of Texas Christian University and three co-authors note that the SEC could beef up its disclosure requirements while protecting CEO privacy. Perryman et al. suggest that the SEC require publicly traded companies to disclose when the CEO has an illness that immediately endangers his or her life, that requires a lengthy absence, that has the potential to shorten his or her lifespan, or that might influence his or her ability to do his or her job.

Jobs' situation might fall into any of the categories. But to the detriment of Apple investors, nobody knows for sure.